MiFID II position limits - trading venues' controls
- Category: MiFID II/MiFIR
Article 57(8) MiFID II requires investment firms and market operators operating trading venues to apply position management controls.
4 April 2023
Joint association (CMC, EFET, ISDA, FESE, FIA, IETA, Europex) pre-trilogue comments on the MiFID II / MiFIR Fundamental Review in relation to commodity derivatives
2 March 2023
European Parliament Report on the proposal for a directive of the European Parliament and of the Council amending Directive 2014/65/EU on markets in financial instruments (COM(2021)0726 – C9‑0438/2021 – 2021/0384(COD)) - in an amendment to Article 57(8) of MiFID II the European Parliament proposes to scope-in derivatives on emission allowances to the position management controls regime.
"Article 57 is amended as follows:
(a) in paragraph 8, the first subparagraph is replaced by the following:
‘8. Member States shall ensure that an investment firm or a market operator operating a trading venue which trades commodity derivatives or derivatives on emission allowances applies position management controls, including powers for the trading venue to:’;
(b) the following paragraph is added:
‘15. By 31 December 2025, ESMA shall submit to the Commission a report with a comprehensive assessment of the position limit and position management controls regimes. The report shall assess:
(a) the effectiveness of the position limit and position management controls regimes to achieve the objectives mentioned in the first subparagraph of paragraph 1 of this Article;
(b) what constitutes a critical or significant position; and
(c) the appropriateness of the limitation of the scope of position limits to agricultural commodity derivatives and critical or significant commodity derivatives that are traded on trading venues, and to economically equivalent OTC contracts, as set out in Article 57.
The report shall notably rely on the data provided competent authorities to ESMA in accordance with paragraphs 5 and 10 of this Article.
Based on the report produced by ESMA and an impact assessment, the Commission shall, if appropriate, submit to the European Parliament and the Council a legislative proposal concerning targeted changes on position limit and position management controls regimes'".
26 July 2022
Commission Delegated Regulation (EU) 2022/1299 of 24 March 2022 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the content of position management controls by trading venues (Text with EEA relevance) published in the EU Official Journal
This regime will operate in tandem with position limits set by the EU Member States' national financial regulatory authorities. ESMA's Discussion Paper on MiFID II/MiFIR of 22 May 2014, ESMA/2014/548 underlines that "these controls are a mandatory part of the new control framework and will necessarily interact closely with the ESMA position limits methodology and the relevant competent authority's position limits regime. Any position limits set by a trading venue using its position management powers will of necessity be of an equal or lesser size than that established by the relevant competent authority". Member States are entrusted by MiFID II with the responsibility to ensure that an investment firm or a market operator operating a trading venue which trades commodity derivatives applies position management controls, including powers for the trading venue to:
- monitor the open interest positions of persons;
- obtain information, including all relevant documentation, from persons about the size and purpose of a position or exposure entered into, information about beneficial or underlying owners, any concert arrangements, and any related assets or liabilities in the underlying market, including, where appropriate, positions held in commodity derivatives that are based on the same underlying and that share the same characteristics on other trading venues and in economically equivalent OTC contracts through members and participants;
- request a person to terminate or reduce a position, on a temporary or permanent basis, and to unilaterally take action to ensure the termination or reduction of the position where the person does not comply with such request; and
- require a person to provide, on a temporary basis, liquidity back into the market at an agreed price and volume with the express intent of mitigating the effects of a large or dominant position.
It is noteworthy, Directive (EU) 2021/338 of the European Parliament and of the Council set out amendments to Article 57 of Directive 2014/65/EU as regards position management controls. In accordance with those amendments to Article 57 of Directive 2014/65/EU, trading venues which trade commodity derivatives have to have in place and apply effective position management controls to prevent and address disorderly trading, support orderly pricing and settlement conditions and ensure the efficiency of markets
Commission Delegated Regulation (EU) of 24 March 2022 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the content of position management controls by trading venues (C(2022) 1709 final) in Recital 3 explains that effective position management controls include for example legal arrangements to obtain and use data of end position holders and parent undertakings as well as technical arrangements, such as reports and metrics to construct for example a position dashboard. Therefore, effective position management controls should be closely intertwined with and rely on the ongoing monitoring by the trading venue.
The said Commission Delegated Regulation of 24 March 2022 also stipulates that as part of their position management controls, trading venues offering trading in commodity derivatives shall set accountability levels in the spot month as defined in Article 2(3) of RTS 21a and in the other months as defined in Article 2(4) of RTS 21a for commodity derivatives made available for trading that are physically settled or can be physically settled. For the above purpose an accountability level is the level of the net position held in a commodity derivative by an end position holder or parent undertaking that, when exceeded, may trigger a request for additional information by the trading venue. When a net position held by an end position holder or a parent undertaking in a commodity derivative exceeds the accountability level set for the spot month or for the other months, the trading venue shall, where deemed appropriate obtain information as to the nature and purpose of the position held in that commodity derivative.
When assessing whether it is appropriate to obtain information, the trading venue shall take into account the frequency by which the accountability levels are exceeded by the same end position holder or parent undertaking, the magnitude of the excess and other relevant information already available.
The interesting tool envisioned by MiFID II is the database on the ESMA's website containing the summaries of the position limits and position management controls (see link below). Feeds informing this database come from the investment firm's or market operator's submissions to the national competent authorities as well as the consequent competent authorities' communications to ESMA. This database, as visited on 26 July 2020, contains records indicating the following stakeholders:
ESMA’s website on position management controls in place at commodity derivative trading venues
- Vienna Stock Exchange,
- ICE Futures Europe (IFEU),
- Marex Spectron International Limited,
- Sunrise Brokers LLP,
- GFI brokers Ltd,
- BGC Brokers L.P.,
- ICAP Energy,
- PVM Oil Futures,
- Tullet Prebon (Europe),
- Griffin Markets Limited,
- London Metal Exchange (LME),
- Norexeco ASA,
- Nasdaq Oslo ASA,
- Fish Pool ASA,
- Nasdaq Stockholm AB.
ESMA’s MiFID II Review report of 1 April 2020 on position limits and position management (ESMA70-156-231, p. 34) indicates that in most cases, the information provided by trading venues explains with a varying degree of detail how the position management controls in place achieve compliance with the requirement of Article 57(8) of MiFID II. However, two trading venues mentioned position management controls that extend beyond the ones set out in Article 57(8) of MiFID II:
- ICE Futures Europe may promulgate limits and associated arrangements in relation to open positions that may be owned, controlled or carried by a member or person for his own account or for another person;
- the London Metal Exchange (LME) has introduced a requirement for the provision of additional information upon request, for positions held by members either directly or on behalf of their client(s) that are above the accountability levels set by the venue for each contract code. Position management controls in relation to commodity derivatives may also be considered in conjunction with the broader obligation for trading venues to establish and maintain effective arrangements, systems and procedures aimed at preventing and detecting insider dealing, market manipulation and attempted insider dealing and market manipulation under Article 16(1) of MAR.